An initiative to link trading on seven of Africa's largest and most liquid securities exchanges could boost liquidity by encouraging cross-border African investment and draw in more international investors, say experts.
However, the project will not directly ameliorate some factors hindering capital markets, including high transaction costs and difficulties in repatriating foreign currency.
The African Exchanges Linkage Project, or AELP, will connect the trading and information systems of seven markets, said Karim Hajji, the CEO of the Casablanca Exchange, and president of the African Securities Exchanges Association, the organization behind the initiative. The participating exchanges include those in South Africa, Morocco, Egypt, Kenya, Nigeria, Mauritius and French West Africa, and account for more than 85% of the continent's total market capitalization, according to ASEA.
Anne Clayton, head of public policy at the JSE Ltd.-owned Johannesburg Stock Exchange, said the primary objectives of the project are "to deepen African capital markets' contribution to fund African economies, increase intra-regional trade and to address the lack of liquidity in African capital markets."
Its backers hope trading will begin within 18 months, after which other exchanges will be able to join.
Despite improvements to market infrastructure across the continent, low liquidity remains the "primary challenge" in capital markets in sub-Saharan Africa with the exception of South Africa, said Hari Chaitanya, head of investor services product management at Standard Bank, the continent's largest custodian bank.
On some exchanges, just a handful of stocks are truly liquid, limiting options for investors. In many African countries, pension funds and other institutional investors are often more likely to invest in Europe or the U.S. than in their neighbors, said Chaitanya.
And when African corporates want to raise capital, many turn to private equity rather than carry out a public listing, said Gerald Gondo, an executive at RisCura. Low levels of free float from companies that do list also contribute to low liquidity, he said.
The dearth of new listings in turn impacts liquidity, said Chaitanya. "It's a kind of chicken and egg situation: you don't get more listings, you don't get more investors, you don't get more liquidity."
The AELP is not the first regional initiative to boost liquidity. The Bourse Régionale des Valeurs Mobilières — which links the exchanges of eight Francophone West African nations that have a shared currency and single central bank — has been the most successful, said Chaitanya.
However, while previous stock exchange integration efforts have taken place on a sub-regional level, the AELP, backed by the African Development Bank is building links on the basis of market liquidity rather than geography, said Selloua Chakri, managing director at SCL Advisory, a capital markets consultancy.
Linking projects typically run into difficulties around settlement and forex. An earlier plan for the AELP floated the vision of a settlement bank with branches in all the participating countries, as well as a special purpose vehicle to reduce forex costs.
That has since been scaled back to a sponsored access model, with links between brokers in the various countries. Settlement will be done on the local exchange by the local broker. That means that cross-border investors will still have to contend with foreign currency costs and risks, but sponsored access is the most straight forward way to deal with risk management issues, said Hajji. "You cannot ask an exchange to assume the risk of a foreign broker. They have no relation with a foreign broker," he said.
The AELP won't directly reduce the high transaction costs that are another dampener on cross-border investing. Nevertheless, increasing trading volumes and greater competition will help reduce investor costs over time, believes Hajji.
Sharing of information should be a major appeal of the AELP. One key piece of progress across capital markets in Africa in recent years has been the migration of many exchanges to electronic trading, though access is limited to local members of the exchange, said Simon Reid, head of investor services at Investec.
The AELP platform will show brokers order books across exchanges and enable trading to take place through a new electronic platform, said Hajji, covering equity, fixed income and derivative products, except in cases where local regulations don't allow investors in that country to trade derivatives.
Greater information sharing and "cross-border visibility of African listed companies" will give investors the opportunity to diversify their portfolios through access to the linked markets, said Clayton.
That could add new strings to investors' bows. Daniel Kuyoh of Alpha Africa Asset Managers in Nairobi, noted that the pricing of Kenyan equities, for instance, are vulnerable to the country's volatile electoral cycles. Greater access to regional markets would give investors the option to deploy defensive strategies to counter political and economic risks, he suggests.
Chaitanya believes there is some appetite amongst local pension and insurance funds to increase their investments in regional markets. "There's not huge demand at this point of time, but it's definitely coming," he said.
And by providing information and trading opportunities that cover the bulk of Africa's market capitalization, the AELP could also help boost inflows from international investors, said Chakri.
"There will be a massive amount of education and awareness [about the AELP] that has to happen to attract foreign investors, as well as investors in Africa," Chakri said.
Chakri said the project will also require a degree of regulatory harmonization between the participating countries in areas such as trading and listing rules, corporate governance and investor protection.
Hajji is realistic about what can be achieved. Tackling thornier issues such as forex controls, would be a reach too far for the AELP, he says, though he promises that ASEA will advocate on issues such as improving access for domestic investors to the other markets.
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